Vishay Precision Group, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview VPG is an internationally recognized designer, manufacturer and marketer of sensors, and sensor-based measurement systems, as well as specialty resistors and strain gages based upon our proprietary technology. We provide precision products and solutions, many of which are “designed-in” by our customers, specializing in the growing markets of stress, force, weight, pressure, and current measurements. A significant portion of our products and solutions are primarily based upon our proprietary foil technology and are produced as part of our vertically integrated structure. We believe this strategy results in higher quality, more cost effective and focused solutions for our customers. Our products are marketed under a variety of brand names that we believe are characterized as having a very high level of precision and quality. Our global operations enable us to produce a wide variety of products in strategically effective geographic locations that also optimize our resources for specific technologies, sensors, assemblies, and systems. The Company also has a long heritage of innovation in precision foil resistors, foil strain gages, and sensors that convert mechanical inputs into an electronic signal for display, processing, interpretation, or control by our instrumentation and systems products. Our advanced sensor product line continues this heritage by offering high-quality foil strain gages produced in a proprietary, highly automated environment. Precision sensors are essential to the accurate measurement, resolution and display of force, weight, pressure, torque, tilt, motion, or acceleration, especially in the legal-for-trade, commercial, and industrial marketplaces. This expertise served as a foundation for our expansion into strain gage instrumentation, load cells, transducers, weighing modules, and complete systems for process control and on-board weighing. Although our products are typically used in the industrial market, our advanced sensors have been used in a consumer electronics product and are being evaluated for other non-industrial applications. The precision sensor market is integral to the development of intelligent products across a wide variety of end markets upon which we focus, including medical, agricultural, transportation, industrial, avionics, military, and space applications. We believe that as original equipment manufacturers (“OEMs”) continue a drive to make products “smarter,” they will integrate more sensors and related systems into their solutions to link the mechanical/physical world with digital control and/or response. We believe this offers a substantial growth opportunity for our products and expertise. Impact of COVID-19 on Our Business As of November 12, 2021, all of the Company’s facilities are open and operational. The Company is continuing to maintain COVID-19 best practices it believes are warranted with respect to working conditions. Nonetheless, given the ongoing uncertainty concerning the magnitude and duration of the COVID-19 pandemic around the world, any ongoing economic disruption may adversely affect the Company’s business and financial results. Overview of Financial Results VPG reports in three product segments: the Foil Technology Products segment, the Force Sensors segment, and the Weighing and Control Systems segment. The Foil Technology Products reporting segment is comprised of the foil resistor and strain gage operating segments. The Force Sensors reporting segment is comprised of transducers, load cells, and modules. The Weighing and Control Systems reporting segment is comprised of complete systems which include load cells and instrumentation for weighing, force control and force measurement for a variety of uses such as process control on-board weighing applications. On June 1, 2021, we completed the acquisition of California-based Diversified Technical Systems, Inc. (“DTS”), a manufacturer of data acquisition systems and sensors for product safety and testing. DTS reports into the Company's Weighing and Control Systems segment. Net revenues for the fiscal quarter ended October 2, 2021 were $82.0 million versus $67.5 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the fiscal quarter ended October 2, 2021 were $5.4 million, or $0.39 per diluted share, versus $5.6 million, or $0.41 per diluted share, for the comparable prior year period. Net revenues for the nine fiscal months ended October 2, 2021 were $227.9 million versus $194.4 million for the comparable prior year period. Net earnings attributable to VPG stockholders for the nine fiscal months ended October 2, 2021 were $14.3 million, or $1.04 per diluted share, versus $10.7 million, or $0.78 per diluted share, for the comparable prior year period. The results of operations for the fiscal quarter ended October 2, 2021 and September 26, 2020 include items affecting comparability as listed in the reconciliations below. The reconciliations below include certain financial measures which are not recognized in accordance with U.S. generally accepted accounting principles ("GAAP"), including adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted net earnings per diluted share, EBITDA and adjusted EBITDA. These non-GAAP measures should not be viewed as an alternative to -25- GAAP measures of performance. Non-GAAP measures such as adjusted gross profits, adjusted gross profit margin, adjusted operating income, adjusted operating margin, adjusted net earnings, adjusted net earnings per diluted share, EBITDA and adjusted EBITDA do not have uniform definitions. These measures, as calculated by VPG, may not be comparable to similarly titled measures used by other companies. Management believes that these non-GAAP measures are useful to investors because each presents what management views as our core operating performance for the relevant period. The adjustments to the applicable GAAP measures relate to occurrences or events that are outside of our core operations, and management believes that the use of these non-GAAP measures provides a consistent basis to evaluate our operating profitability and performance trends across comparable periods. In addition, the Company has historically provided these or similar non-GAAP measures and understands that some investors and financial analysts find this information helpful in analyzing the Company’s performance and in comparing the Company’s financial performance to that of its peer companies and competitors. Management believes that the Company’s non-GAAP measures are regarded as supplemental to its GAAP financial results. Beginning in the fourth quarter of 2020, the Company determined to include the impact of foreign currency exchange rates on its assets and liabilities in certain of its non-GAAP measures for its current and comparative periods. Gross Profit Operating Income Net Earnings Attributable to VPG Stockholders Diluted Earnings Per share Three months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 As reported - GAAP $ 31,845 $ 27,349 $ 7,265 $ 8,121 $ 5,379 $ 5,598 $ 0.39 $ 0.41 As reported - GAAP Margins 38.8 % 40.5 % 8.9 % 12.0 % Acquisition purchase accounting adjustments (a) 1,329 4 1,329 4 1,329 4 0.10 — Acquisition costs — — — — — — — COVID-19 impact (b) 111 (22) 111 (320) 111 (320) 0.01 (0.02) Start-up costs (c) 970 — 970 — 970 — 0.07 — Impairment of goodwill and indefinite-lived intangibles — — — — — — — Restructuring costs — — 84 — 84 — 0.01 Foreign exchange (gain)/loss (d) — — 38 (162) 0.01 (0.01) Less: Tax effect of reconciling items and discrete tax items — — 754 (109) 0.06 (0.01) As Adjusted - Non GAAP $ 34,255 $ 27,331 $ 9,675 $ 7,889 $ 7,073 $ 5,313 $ 0.52 $ 0.40 As Adjusted - Non GAAP Margins 41.8 % 40.5 % 11.8 % 11.7 % -26- Gross Profit Operating Income Net Earnings Attributable to VPG Stockholders Diluted Earnings Per share Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 As reported - GAAP 90,265 75,524 18,628 16,736 $ 14,260 $ 10,669 $ 1.04 $ 0.78 As reported - GAAP Margins 39.6 % 38.9 % 8.2 % 8.6 % Acquisition purchase accounting adjustments (a) 2,259 560 2,259 560 2,259 560 0.17 0.04 Acquisition costs — 1,198 — 1,198 — 0.09 — COVID-19 impact (b) (66) 536 (574) 123 (574) 123 (0.04) 0.01 Start-up costs (c) 2,258 — 2,258 — 2,258 — 0.17 — Impairment of goodwill and indefinite-lived intangibles — — 1,223 — 1,223 — 0.09 — Restructuring costs — 713 — 713 — 0.05 Foreign exchange (gain)/loss (d) (523) 123 (0.04) 0.01 Less: Tax effect of reconciling items and discrete tax items 2,160 37 0.16 — As Adjusted - Non GAAP $ 94,716 $ 76,620 $ 24,992 $ 18,132 $ 17,941 $ 12,151 $ 1.32 $ 0.89 As Adjusted - Non GAAP Margins 41.6 % 39.4 % 11.0 % 9.3 % Three months ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net earnings attributable to VPG stockholders $ 5,379 $ 5,598 $ 14,260 $ 10,669 Interest Expense 328 309 906 1,037 Income tax expense 1,662 2,109 3,688 4,367 Depreciation 2,955 2,426 8,691 7,506 Amortization 970 596 2,342 1,828 EBITDA 11,294 $ 11,038 29,887 $ 25,407 EBITDA MARGIN 13.8 % 16.3 % 13.1 % 13.1 % Impairment of goodwill and indefinite-lived intangibles — — 1,223 — Acquisition purchase accounting adjustments (a) 1,329 4 2,259 560 Acquisition costs — — 1,198 — Restructuring costs — 84 — 713 COVID-19 impact (b) 111 (320) (574) 123 Start-up costs (c) 970 — 2,258 — Foreign exchange (gain)/loss (d) 38 (162) (523) 123 ADJUSTED EBITDA $ 13,742 $ 10,644 $ 35,728 $ 26,926 ADJUSTED EBITDA MARGIN 16.8 % 15.8 % 15.7 % 13.9 % (a) Acquisition purchase accounting adjustments include fair market value adjustments associated with inventory recorded as a component of costs of products sold. (b) COVID-19 impact is the net impact to the Company of costs incurred as a result of the COVID-19 pandemic, net of government subsidies received. (c) Start-up costs in 2021 are associated with the ramp up of our new manufacturing facility in Israel. (d) Impact of foreign currency exchange rates on assets and liabilities. Note that impacts in prior year have been added to this table. -27- Financial Metrics We utilize several financial measures and metrics to evaluate performance and assess the future direction of our business. These key financial measures and metrics include net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover. Gross profit margin is computed as gross profit as a percentage of net revenues. Gross profit is generally net revenues less costs of products sold, but could also include certain other period costs. Gross profit margin is a function of net revenues, but also reflects our cost-cutting programs and our ability to contain fixed costs. End-of-period backlog is one indicator of potential future sales. We include in our backlog only open orders that have been released by the customer for shipment in the next twelve months. If demand falls below customers’ forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, backlog is not necessarily indicative of the results expected for future periods. Another important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period compared with the amount of product shipped during that period. A book-to-bill ratio that is greater than one indicates that revenues may increase in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of lower demand and may foretell declining sales. The book-to-bill ratio is also impacted by the timing of orders, particularly from our project-based product lines. We focus on inventory turnover as a measure of how well we manage our inventory. We define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each quarter-end balance) for this same period. A higher level of inventory turnover reflects more efficient use of our capital. The quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business. The following tables show net revenues, gross profit margin, end-of-period backlog, book-to-bill ratio, and inventory turnover for our business as a whole and by segment during the five quarters beginning with the third quarter of 2020 through the third quarter of 2021 (dollars in thousands) : 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 2020 2020 2021 2021 2021 Net revenues $ 67,525 $ 75,445 $ 70,589 $ 75,339 $ 81,974 Gross profit margin 40.5 % 38.1 % 40.5 % 39.6 % 38.8 % End-of-period backlog $ 90,800 $ 87,600 $ 100,700 $ 130,900 $ 146,700 Book-to-bill ratio 0.95 0.93 1.21 1.40 1.21 Inventory turnover 2.38 2.86 2.67 2.64 2.55 -28- 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 2020 2020 2021 2021 2021 Foil Technology Products Net revenues $ 32,906 $ 36,477 $ 32,711 $ 33,308 $ 32,790 Gross profit margin 41.1 % 38.4 % 39.9 % 38.9 % 32.1 % End-of-period backlog $ 48,500 $ 43,700 $ 48,400 $ 60,600 $ 72,500 Book-to-bill ratio 1.01 0.84 1.19 1.37 1.38 Inventory turnover 2.63 3.05 2.72 2.67 2.88 Force Sensors Net revenues $ 13,862 $ 16,251 $ 16,933 $ 17,216 $ 17,704 Gross profit margin 30.5 % 29.1 % 35.7 % 34.7 % 34.5 % End-of-period backlog $ 21,300 $ 24,700 $ 26,800 $ 30,700 $ 30,700 Book-to-bill ratio 0.90 1.18 1.14 1.23 1.01 Inventory turnover 2.28 2.74 2.72 2.57 2.38 Weighing and Control Systems Net revenues $ 20,757 $ 22,717 $ 20,945 $ 24,815 $ 31,480 Gross profit margin 46.2 % 44.0 % 45.6 % 43.9 % 48.3 % End-of-period backlog $ 21,000 $ 19,200 $ 25,500 $ 39,600 $ 43,500 Book-to-bill ratio 0.88 0.88 1.30 1.56 1.14 Inventory turnover 2.13 2.67 2.54 2.64 2.32 Net revenues for the third quarter of 2021 increased 8.8% from the second quarter of 2021 mainly due to increased volume in Forces Sensor and Weighing and Control Systems reporting segments. Net revenues increased 21.4% from the third quarter of 2020 with increased volume primarily from the Force Sensors reporting segment and the Weighing and Control Systems segment. The increase in the Weighing and Control Systems reporting segment was aided by the addition of revenues from the acquisition of DTS. Net revenues in the Foil Technology Products reporting segment decreased 1.6% compared to the second quarter of 2021 and decreased 0.4% from the third quarter of 2020. The sequential decline primarily reflected lower revenue of advanced sensors to our Other markets which was mainly the result of the transition to our new advanced sensors facility. Compared to a year ago, higher revenue of precision foil resistors in the Test and Measurements market was offset by lower revenue of precision foil resistors and Pacific Instruments systems in the Avionics, Military and Space market and by lower revenue of advanced sensors to our Other markets which was mainly the result of the transition to our new advanced sensors facility. Net revenues in the Force Sensors reporting segment increased 2.8% from the second quarter of 2021 and increased 27.7% from the third quarter of 2020. The sequential increase was primarily due to higher revenue in our Industrial Weighing markets, partially offset by lower revenue for precision agriculture. The year-over-year increase primarily reflected operational limitations in the third fiscal quarter of 2020 from the COVID pandemic at our facility in India. Net revenues in the Weighing and Control Systems reporting segment increased 26.9% from the second quarter of 2021 and increased 51.7% from the third quarter of 2020. The sequential increase in net revenues was primarily due to the addition of revenue for DTS, and higher revenue of Dynamic Systems, Inc. ("DSI") and KELK products to the Steel market The year-over-year increase in revenue was primarily attributable to the addition of revenue for DTS, which was acquired on June 1, 2021, higher revenue of our onboard weighing products for the Transportation market, and higher revenue of our DSI products for the Steel market. Overall gross profit margin in the third quarter of 2021 decreased 0.8% as compared to the second quarter of 2021 and decreased 1.7% from the third quarter of 2020. Sequentially, the increase in the gross profit margin in the Weighing and Controls Systems reporting segment was completely offset by a decrease in the gross profit margin in the Foil Technology Products reporting segment, while the Force Sensors reporting segment gross profit margin remained flat. In the Weighing and Control Systems reporting segment, the sequential increase was mainly due to higher revenue, the addition of DTS, and favorable product mix. The Foil Technology Products -29- reporting segment gross profit margins decreased sequentially due to lower volume and unfavorable product mix, a reduction in inventory, labor inefficiencies, and unfavorable exchange rates. Compared to the third quarter of 2020, the Foil Technology Products reporting segment had a lower gross profit margin due to impacts from charges related to start-up costs in our new advanced sensors facility and the impact of COVID-19 in conjunction with unfavorable foreign exchange rates, higher rent and manufacturing overhead related to the new advanced sensors facility, and a reduction in inventory. The Force Sensors reporting segment increase in gross profit margin as compared to 2020 was primarily due to higher revenue. In the Weighing and Control Systems reporting segment, the decrease in gross profit margin as compared to the third quarter of 2020 was due to the impact of charges related to purchase accounting adjustments from the DTS acquisition and the impact of COVID-19, which were partially offset by higher revenue coming from DTS . Optimize Core Competence The Company’s core competency and key value proposition is providing customers with proprietary foil technology products and precision measurement sensors and sensor-based systems. Our foil technology resistors and strain gages are recognized as global market leading products that provide high precision and high stability over extreme temperature ranges, and long life. Our force sensor products and our weighing and control systems products are also certified to meet some of the highest levels of precision measurements of force, weight, pressure, torque, tilt, motion, and acceleration. We continue to optimize all aspects of our development, manufacturing and sales processes, including by increasing our technical sales efforts; continuing to innovate in product performance and design; and refining our manufacturing processes Our foil technology research group developed innovations that enhance the capability and performance of our strain gages, while simultaneously reducing their size and power consumption as part of our advanced sensors product line. We believe this unique foil technology will create new markets as customers “design in” these next generation products in existing and new applications. Our development engineering team is also responsible for creating new processes to further automate manufacturing, and improve productivity and quality. Our advanced sensors manufacturing technology also offers us the capability to produce high-quality foil strain gages in a highly automated environment, which we believe results in reduced manufacturing and lead times, improved quality and increased margins. As a sign of our commitment to these businesses, we signed a long-term lease for a state of the art facility which has been constructed in Israel. The transition of our advanced sensors business to that facility was completed in the third quarter of 2021. Our design, research, and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We intend to leverage our insights into customer demand to continually develop and roll out new, innovative products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends in terms of form, fit, and function. We also seek to achieve significant production cost savings through the transfer, expansion, and construction of manufacturing operations in countries such as India, China, and Israel, where we can benefit from lower labor costs, improved efficiencies, or available tax and other government-sponsored incentives. For example in 2019, we incurred restructuring expense related to closing and downsizing of facilities as part of the manufacturing transitions of our force sensor products to facilities in India and China, which marked key milestones in our ongoing strategic initiatives to align and consolidate our manufacturing footprint. Acquisition Strategy We expect to continue to make strategic acquisitions where opportunities present themselves to grow our segments. Historically, our growth and acquisition strategy has been largely focused on vertical product integration, using our foil strain gages in our force sensor products, and incorporating those products into our weighing and control systems. The acquisitions of Stress-Tek and KELK, each of which employs our foil strain gages to manufacture load cells for its systems, continued this strategy. Additionally, the KELK acquisition resulted in the acquisition of certain optical sensor technology. The Pacific Instruments acquisition significantly broadened our existing data acquisition offerings and opened new markets for us. The acquisition of DSI expanded our position in the steel market. On June 1, 2021, we completed the acquisition of California-based Diversified Technical Systems, Inc., a manufacturer of data acquisition systems and sensors for product safety and testing, DTS is an established niched-market leader with a strong brand in automotive, avionics, military and defense markets. DTS adds complementary technology to our platform and brings unique engineering capabilities, centered on miniaturized data acquisition and systems integration with sensor technology for critical testing applications. We expect to expand our expertise, and our acquisition focus, outside our traditional vertical approach to other precision sensor solutions in the fields of measurement of force, weight, pressure, torque, tilt, motion, and acceleration. We believe acquired businesses will benefit from improvements we implement to reduce redundant functions and from our current global manufacturing and distribution footprint. -30- Research and Development Research and development will continue to play a key role in our efforts to introduce innovative products to generate new sales and to improve profitability. We expect to continue to expand our position as a leading supplier of precision foil technology products. We believe our R&D efforts should provide us with a variety of opportunities to leverage technology, products, and our manufacturing base in order to ultimately improve our financial performance. Cost Management To be successful, we believe we must seek new strategies for controlling operating costs. Through automation in our plants, we believe we can optimize our capital and labor resources in production, inventory management, quality control, and warehousing. We are in the process of moving some manufacturing to more cost effective locations. This may enable us to become more efficient and cost competitive, and also maintain tighter controls of the operation. Production transfers, facility consolidations, and other long-term cost-cutting measures require us to initially incur significant severance and other exit costs. We are realizing the benefits of our restructuring through lower labor costs and other operating expenses, and expect to continue reaping these benefits in future periods. However, these programs to improve our profitability also involve certain risks which could materially impact our future operating results, as further detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 11, 2021. We are evaluating plans to further reduce our costs by consolidating additional manufacturing operations. These plans may require us to incur restructuring and severance costs in future periods. While streamlining and reducing fixed overhead, we are exercising caution so that we will not negatively impact our customer service or our ability to further develop products and processes. Goodwill We test the goodwill in each of our reporting units for impairment at least annually, and whenever events or changes in circumstances occur indicating that a possible impairment may have been incurred. Determining whether to test goodwill for impairment, and the application of goodwill impairment tests, require significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Changes in these estimates could materially affect the determination of fair value for each reporting unit. A slowdown or deferral of orders for a business, with which we have goodwill associated, could impact our valuation of that goodwill. Foreign Currency We are exposed to foreign currency exchange rate risks, particularly due to transactions in currencies other than the functional currencies of certain subsidiaries. U.S. GAAP requires that entities identify the “functional currency” of each of their subsidiaries and measure all elements of the financial statements in that functional currency. A subsidiary’s functional currency is the currency of the primary economic environment in which it operates. In cases where a subsidiary is relatively self-contained within a particular country, the local currency is generally deemed to be the functional currency. However, a foreign subsidiary that is a direct and integral component or extension of the parent company’s operations generally would have the parent company’s currency as its functional currency. We have subsidiaries that fall into each of these categories. Foreign Subsidiaries which use the Local Currency as the Functional Currency Our operations in Europe, Canada, and certain locations in Asia primarily generate and expend cash using local currencies, and accordingly, these subsidiaries utilize the local currency as their functional currency. For those subsidiaries where the local currency is the functional currency, assets and liabilities in the consolidated condensed balance sheets have been translated at the rate of exchange as of the balance sheet date. Translation adjustments do not impact the results of operations and are reported as a separate component of equity. For those subsidiaries where the local currency is the functional currency, revenues and expenses are translated at the average exchange rate for the period. While the translation of revenues and expenses into U.S. dollars does not directly impact the consolidated condensed statement of operations, the translation effectively increases or decreases the U.S. dollar equivalent of revenues generated and expenses incurred in those foreign currencies. Foreign Subsidiaries which use the U.S. Dollar as the Functional Currency Our operations in Israel and certain locations in Asia primarily generate cash in U.S. dollars, and accordingly, these subsidiaries utilize the U.S. dollar as their functional currency. For those foreign subsidiaries where the U.S. dollar is the functional -31- currency, all foreign currency financial statement amounts are remeasured into U.S. dollars. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in the results of operations. While these subsidiaries transact most business in U.S. dollars, they may have significant costs, particularly related to payroll, which are incurred in the local currency and significant lease assets and liabilities. Effects of Foreign Exchange Rate on Operations For the fiscal quarter ended October 2, 2021, exchange rates increased net revenues by $0.9 million, and increased costs of products sold and selling, general, and administrative expenses by $1.8 million, when compared to the comparable prior year period. For the nine fiscal months ended October 2, 2021, exchange rates increased net revenues by $5.8 million, and increased costs of products sold and selling, general, and administrative expenses by $7.6 million, when compared to the comparable prior year period. Off-Balance Sheet Arrangements As of October 2, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements. -32- Results of Operations Statement of operations’ captions as a percentage of net revenues and the effective tax rates were as follows: Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Costs of products sold 61.2 % 59.5 % 60.4 % 61.1 % Gross profit 38.8 % 40.5 % 39.6 % 38.9 % Selling, general, and administrative expenses 30.0 % 28.4 % 30.4 % 29.9 % Operating income 8.9 % 12.0 % 8.2 % 8.6 % Income before taxes 8.7 % 11.5 % 8.0 % 7.8 % Net earnings 6.6 % 8.4 % 6.3 % 5.5 % Net earnings attributable to VPG stockholders 6.6 % 8.3 % 6.3 % 5.5 % Effective tax rate 23.4 % 27.1 % 20.3 % 29.0 % Net Revenues Net revenues were as follows (dollars in thousands) : Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net revenues $ 81,974 $ 67,525 $ 227,902 $ 194,367 Change versus comparable prior year period $ 14,449 $ 33,535 Percentage change versus prior year period 21.4 % 17.3 % Changes in net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume 7.6 % 8.1 % Change in average selling prices 0.8 % 0.2 % Foreign currency effects 1.7 % 3.5 % Acquisitions 11.3 % 5.5 % Net change 21.4 % 17.3 % During the fiscal quarter and nine fiscal months ended October 2, 2021, net revenues increased 21.4% and 17.3%, respectively, as compared to the comparable prior year periods, with increased volume primarily from the Force Sensors reporting segment and the Weighing and Control Systems segment. The increase in the Weighing and Control Systems reporting segment was aided by the addition of revenues from the acquisition of DTS. -33- Gross Profit Margin Gross profit as a percentage of net revenues was as follows: Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Gross profit margin 38.8 % 40.5 % 39.6 % 38.9 % The gross profit margin for the fiscal quarter ended October 2, 2021 decreased 1.7% as compared to the comparable prior year period with higher gross profit margins in the Force Sensors and Weighing and Control Systems reporting segments being offset by lower margin in the Foil Technology Products reporting segment. The gross profit margin for the nine fiscal months ended October 2, 2021 increased 0.7% as compared to the comparable prior year period, mainly from higher gross profit margins in the Force Sensors reporting segment, partially offset by lower gross profit margins in the Foil Technology and Weighing and Controls Systems reporting segments. Segments Analysis of revenues and gross profit margins for each of our reportable segments is provided below. Foil Technology Products Net revenues of the Foil Technology Products segment were as follows (dollars in thousands) : Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net revenues $ 32,790 $ 32,906 $ 98,809 $ 95,168 Change versus comparable prior year period $ (116) $ 3,641 Percentage change versus prior year period (0.4) % 3.8 % Changes in Foil Technology Products segment net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume (1.2) % 1.8 % Change in average selling prices 0.9 % 0.6 % Foreign currency effects (0.1) % 1.4 % Net change (0.4) % 3.8 % Net revenues decreased 0.4% for the fiscal quarter ended October 2, 2021, as compared to the comparable prior year period. Compared to a year ago, higher revenue of precision foil resistors in the Test and Measurements market was offset by lower revenue of precision foil resistors and Pacific Instruments systems in the Avionics, Military and Space market and by lower revenue of advanced sensors to our Other markets which was mainly the result of the transition to our new advanced sensors facility. Net revenues increased 3.8% for the nine fiscal months ended October 2, 2021, as compared to the comparable prior year period. Increases in net revenues are primarily attributable to our advanced sensors product line in other markets, test and measurement markets, and general industrial markets, in addition to favorable exchange rate impacts. Gross profit as a percentage of net revenues for the Foil Technology Products segment was as follows: Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Gross profit margin 32.1 % 41.1 % 37.0 % 39.9 % -34- The gross profit margin decreased 9.0% for the fiscal quarter ended October 2, 2021, when compared to the comparable prior year period due to impacts from charges related to start-up costs in our new advanced sensors facility and the impact of COVID-19 in conjunction with unfavorable foreign exchange rates, higher rent and manufacturing overhead related to the new advanced sensors facility, and a reduction in inventory. The gross profit margin decreased 2.9% for the nine fiscal months ended October 2, 2021 as compared to the comparable prior year period. Impacts from charges related to start-up costs in our new advanced sensors facility and the impact COVID-19 completely offset the higher volume in our foil resisters products. Force Sensors Net revenues of the Force Sensors segment were as follows (dollars in thousands) : Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net revenues $ 17,704 $ 13,862 $ 51,853 $ 37,473 Change versus comparable prior year period $ 3,842 $ 14,380 Percentage change versus prior year period 27.7 % 38.4 % Changes in Force Sensors segment net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume 25.6 % 35.9 % Change in average selling prices 0.2 % (0.9) % Foreign currency effects 1.9 % 3.4 % Net change 27.7 % 38.4 % Net revenues increased 27.7% for the fiscal quarter ended October 2, 2021, and 38.4% for the nine fiscal months ended October 2, 2021 as compared to the comparable prior year periods. The increases primarily reflected operational limitations in 2020 from the COVID pandemic at our facility in India. Gross profit as a percentage of net revenues for the Force Sensors segment was as follows: Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Gross profit margin 34.5 % 30.5 % 34.9 % 23.6 % The gross profit margin for the fiscal quarter ended October 2, 2021 increased 4.0% as compared to the comparable prior year period primarily due to higher revenue. The gross profit margin for the nine fiscal months ended October 2, 2021 increased 11.3% as compared to the prior year period primarily due to higher revenue, favorable exchange rate impacts and an increase in inventory. Weighing and Control Systems Net revenues of the Weighing and Control Systems segment were as follows (dollars in thousands) : Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net revenues $ 31,480 $ 20,757 $ 77,240 $ 61,726 Change versus comparable prior year period $ 10,723 $ 15,514 Percentage change versus prior year period 51.7 % 25.1 % -35- Changes in Weighing and Control Systems segment net revenues were attributable to the following: vs. prior year quarter vs. prior year- to-date Change attributable to: Change in volume 8.3 % 4.4 % Change in average selling prices 1.0 % 0.5 % Foreign currency effects 5.6 % 6.4 % Acquisitions 36.8 % 13.8 % Net change 51.7 % 25.1 % Net revenues increased 51.7% for the fiscal quarter ended October 2, 2021 as compared to the comparable prior year period. The year-over-year increase in revenue was primarily attributable to the addition of revenue for DTS, which was acquired on June 1, 2021, higher revenue of our onboard weighing products for the Transportation market, and higher revenue of our DSI products for the Steel market. Net revenues increased 25.1% for the nine fiscal months ended October 2, 2021 as compared to the comparable prior year period primarily due to the addition of revenue for DTS, higher revenue of our onboard weighing products for the transportation market and favorable exchange rate impacts. Gross profit as a percentage of net revenues for the Weighing and Control Systems segment were as follows: Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Gross profit margin 48.3 % 46.2 % 46.1 % 46.5 % The gross profit margin for the fiscal quarter ended October 2, 2021 of 48.3% increased from the third quarter of 2020 due to higher revenue coming from DTS. The gross profit margin for the nine fiscal months ended October 2, 2021 of 46.1%, decreased from the prior year period due to the impacts of charges related to purchase accounting adjustments from the DTS acquisition and an unfavorable product mix, partially offset by the higher revenues coming from DTS and favorable exchange rate impacts. Selling, General, and Administrative Expenses Selling, general, and administrative (“SG&A”) expenses are summarized as follows (dollars in thousands) : Fiscal quarter ended Nine fiscal months ended October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Total SG&A expenses $ 24,580 $ 19,144 $ 69,216 $ 58,075 As a percentage of net revenues 30.0 % 28.4 % 30.4 % 29.9 % SG&A expenses for the fiscal quarter and nine fiscal months ended October 2, 2021 increased compared to the comparable prior year periods with additional SG&A expenses related to personnel costs and unfavorable foreign currency impacts and SG&A expenses from the acquisition of DTS. -36- Impairment of Goodwill and Indefinite-lived Intangible Assets In the second fiscal quarter of 2021, as a result of our interim impairment test, we recorded a $1.2 million pre-tax, non-cash impairment charge which reduced the carrying value of our goodwill and indefinite-lived intangible assets. See Note 4 for further discussion. Acquisition Costs Acquisition costs associated with the acquisition of DTS were as follows (in thousands): Fiscal quarter ended Nine fiscal months ended October 2, 2021 October 2, 2021 Legal fees $ — $ 341 Appraisal fees — 18 Other (investment banker and insurance costs) — 839 $ — $ 1,198 Restructuring Costs Restructuring costs reflect the cost reduction programs implemented by the Company. Restructuring costs are expensed during the period in which the Company determines it will incur those costs and all requirements for accrual are met. Because these costs are recorded based upon estimates, actual expenditures for the restructuring activities may differ from the initially recorded costs. If the initial estimates are too low or too high, the Company could be required to either record additional expense in future periods or to reverse part of the previously recorded charges. The Company recorded $0.0 million and $0.1 million of restructuring costs during the fiscal quarter ended October 2, 2021 and September 26, 2020, respectively, and $0.0 million and $0.7 million of restructuring costs during the nine fiscal months ended October 2, 2021 and September 26, 2020, respectively. Restructuring costs recorded in the prior year were comprised primarily of employee terminations costs, including severance and statutory retirement allowances, and were incurred in connections with various cost reduction programs. Other Income (Expense) Interest expense for the fiscal quarter ended October 2, 2021 was higher when compared with interest expense in the comparable prior year period reflecting the impact of increased borrowings on the Company's revolving credit facility in conjunction with the acquisition of DTS. Interest expense for the nine fiscal months ended October 2, 2021 was lower when compared with the comparable prior year period mainly due to more favorable borrowing rates in 2021. -37- The following table analyzes the components of the line “Other” on the consolidated condensed statements of operations (in thousands) : Fiscal quarter ended October 2, 2021 September 26, 2020 Change Foreign exchange loss $ (38) $ 162 $ (200) Interest income 151 29 122 Pension expense (151) (159) 8 Other 212 (71) 283 $ 174 $ (39) $ 213 Nine fiscal months ended October 2, 2021 September 26, 2020 Change Foreign exchange gain (loss) $ 522 $ (123) $ 645 Interest income 216 205 11 Pension expense (431) (482) 51 Other 114 (229) 343 $ 421 $ (629) $ 1,050 Foreign currency exchange gains and losses represent the impact of changes in foreign currency exchange rates. For the fiscal quarter ended October 2, 2021, the change in foreign exchange gains and losses during the period, as compared to the prior year period, is largely due to exposure to currency fluctuations with the Canadian dollar, the euro, the Israeli shekel and the British pound. For the nine fiscal months ended October 2, 2021, the change in foreign exchange gains and losses during the period as compared to the prior year period is largely due to exposure to currency fluctuations with the euro, the Israeli shekel, and the Japanese yen. Income Taxes VPG calculates the tax provision for interim periods using an estimated annual effective tax rate methodology based on projected full-year pre-tax earnings among the taxing jurisdictions in which we operate with adjustments for discrete items. The effective tax rate for the fiscal quarter ended October 2, 2021 was 23.4% compared to 27.1% for the fiscal quarter ended September 26, 2020 and the effective tax rate for the nine fiscal months ended October 2, 2021 was 20.3% compared to 29.0% for the nine fiscal months ended September 26, 2020. The tax rate for both periods presented in 2021 is lower than the prior year periods primarily due to the acquisition of DTS, which enabled the Company to reduce its valuation allowance against deferred tax assets, tax rate changes in certain foreign jurisdictions, and changes in the mix of worldwide income. The Company and its subsidiaries are subject to income taxes imposed by the U.S., various states, and the foreign jurisdictions in which we operate. Each jurisdiction establishes rules that set forth the years which are subject to examination by its tax authorities. While the Company believes the tax positions taken on its tax returns for each jurisdiction are supportable, they may still be challenged by the jurisdiction's tax authorities. In anticipation of such challenges, the Company has established reserves for tax-related uncertainties. These liabilities are based on the Company’s best estimate of the potential tax exposures in each respective jurisdiction. It may take a number of years for a final tax liability in a jurisdiction to be determined, particularly in the event of an audit. If an uncertain matter is determined favorably, there could be a reduction in the Company’s tax expense. An unfavorable determination could increase tax expense and could require a cash payment, including interest and penalties. -38- Financial Condition, Liquidity, and Capital Resources We believe that our current cash and cash equivalents, credit facilities and projected cash from operations will be sufficient to meet our liquidity needs for at least the next 12 months. In March, 2020, we entered into a third amended and restated credit agreement. The terms of our credit agreement provide for the following facilities: (1) secured revolving facility of $75.0 million, with a sublimit of $10.0 million which can be used for letters of credit for the account of the Company or its subsidiaries that are parties to the Credit Agreement, the proceeds of which may be used for working capital and general corporate purposes. The aggregate principal amount of the 2020 Revolving Facility may be increased by a maximum of $25.0 million upon the request of the Company, subject to the terms of the 2020 Credit Agreement. The 2020 Credit Agreement terminates on March 20, 2025. Interest payable on amounts borrowed under the 2020 Revolving Facility is based upon, at the Company’s option, (1) the greatest of: the Agent’s prime rate, the Federal Funds rate, or a LIBOR floor (the “Base Rate”), or (2) LIBOR or CDOR plus a specified margin. An interest margin of 0.25% is added to Base Rate loans. Depending upon the Company’s leverage ratio, an interest rate margin ranging from 1.50% to 2.75% per annum is added to the applicable LIBOR or CDOR rate to determine the interest payable on the Libor or CDOR loans. The Company is required to pay a quarterly fee of 0.25% per annum to 0.40% per annum on the unused portion of the 2020 Revolving Facility, which is determined based on the Company’s leverage ratio each quarter. Additional customary fees apply with respect to letters of credit. The obligations of the Company under the 2020 Credit Agreement are secured by pledges of stock in certain domestic and foreign subsidiaries, as well as guarantees by substantially all of the Company’s domestic subsidiaries. The obligations of the Company and the guarantors under the 2020 Credit Agreement are secured by substantially all the assets (excluding real estate) of the Company and such guarantors. The 2020 Credit Agreement restricts the Company from paying cash dividends and requires the Company to comply with other customary covenants, representations, and warranties, including the maintenance of specific financial ratios. The financial maintenance covenants include interest coverage ratio and a leverage ratio. We were in compliance with these covenants at October 2, 2021. If the Company is not in compliance with any of these covenant restrictions, the credit facility could be terminated by the lenders, and all amounts outstanding pursuant to the credit facility could become immediately payable. Our business has historically generated significant cash flow. For the nine fiscal months ended October 2, 2021, cash provided by operating activities was $18.1 million compared to $22.8 million in the comparable prior year period. Our net cash used in investing activities for the nine fiscal months ended October 2, 2021 was higher compared to the prior year period mainly due to the acquisition of DTS. Our net cash provided by financing activities for the nine fiscal months ended October 2, 2021 was higher compared to prior year mainly due to the borrowings on the 2020 credit facility for the acquisition of DTS. Adjusted free cash flow generated during the nine fiscal months ended October 2, 2021, was $7.1 million. We refer to the amount of cash provided by operating activities ($18.1 million) in excess of our capital expenditures ($11.2 million) and net of proceeds from the sale of assets ($0.2 million) as “adjusted free cash flow.” The following table summarizes the components of net cash at October 2, 2021 and December 31, 2020 (in thousands) : October 2, 2021 December 31, 2020 Cash and cash equivalents $ 75,544 $ 98,438 Third-party debt, including current and long-term: Revolving debt 61,000 41,000 Third-party debt held by Japanese subsidiary — 18 Deferred financing costs (308) (374) Total third-party debt 60,692 40,644 Net cash $ 14,852 $ 57,794 Measurements such as “adjusted free cash flow” and “net cash" do not have uniform definitions and are not recognized in accordance with U.S. GAAP. Such measures should not be viewed as alternatives to GAAP measures of performance or liquidity. However, management believes that “adjusted free cash flow” is a meaningful measure of our ability to fund acquisitions, and that an analysis of “net cash” assists investors in understanding aspects of our cash and debt management. These measures, as calculated by us, may not be comparable to similarly titled measures used by other companies. Approximately 90% of our cash and cash equivalents balance at October 2, 2021 and December 31, 2020 was held by our non-U.S. subsidiaries. -39- See the following table for the percentage of cash and cash equivalents, by region, at October 2, 2021 and December 31, 2020: October 2, 2021 December 31, 2020 Israel 24 % 26 % Asia 25 % 18 % Europe 20 % 16 % United States 10 % 10 % United Kingdom 14 % 18 % Canada 7 % 12 % 100 % 100 % We earn a significant amount of our operating income outside the United States, the majority of which is deemed to be indefinitely reinvested in the foreign jurisdictions. As a result, as discussed above, a significant portion of our cash and short-term investments are held by foreign subsidiaries. The Company will continue to evaluate its cash needs, however we currently do not intend, nor do we foresee a need, to repatriate funds in excess of what is already planned. The Company will evaluate the possibility of repatriating future cash provided such repatriation can be accomplished in a tax efficient manner. In addition, we expect existing domestic cash, short-term investments, and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. If we should require more capital in the United States than is generated by our domestic operations, for example, to fund significant discretionary activities, such as business acquisitions, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the United States through debt or equity issuances. These alternatives could result in higher tax expense, increased interest expense, or dilution of our earnings. We consider the majority of the undistributed earnings of our foreign subsidiaries, as of October 2, 2021, to be indefinitely reinvested. Our financial condition as of October 2, 2021 remains strong, with a current ratio (current assets to current liabilities) of 4.1 to 1.0, as compared to a ratio of 4.7 to 1.0 at December 31, 2020. Cash paid for property and equipment for the nine fiscal months ended October 2, 2021 was $11.2 million compared to $15.8 million in the comparable prior year period. -40- Safe Harbor Statement From time to time, information provided by us, including but not limited to statements in this report, or other statements made by or on our behalf, may contain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those anticipated. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated, or projected. Among the factors that could cause actual results to materially differ include: general business and economic conditions; global labor and supply chain challenges; difficulties or delays in identifying, negotiating and completing acquisitions and integrating acquired companies; the inability to realize anticipated synergies and expansion possibilities; difficulties in new product development; changes in competition and technology in the markets that we serve and the mix of our products required to address these changes; changes in foreign currency exchange rates; political, economic, health (including the COVID-19 pandemic) and military instability in the countries in which we operate; difficulties in implementing our cost reduction strategies, such as underutilization of production facilities, labor unrest or legal challenges to our lay-off or termination plans, operation of redundant facilities due to difficulties in transferring production to achieve efficiencies; significant developments from the recent and potential changes in tariffs and trade regulation; our efforts and efforts by governmental authorities to mitigate the COVID-19 pandemic, such as travel bans, shelter-in-place orders and business closures and the related impact on resource allocations, manufacturing and supply chains; the Company’s status as a “critical”, “essential” or “life-sustaining” business in light of COVID-19 business closure laws, orders and guidance being challenged by a governmental body or other applicable authority; the Company’s ability to execute its business continuity, operational and budget plans in light of the COVID-19 pandemic; and other factors affecting our operations, markets, products, services, and prices that are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in our Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2021. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. -41- Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the market risks previously disclosed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 11, 2021.